30+ fund managers, no fees: Inside Future Generation’s charitable fund-of-funds model

What do you get when you enlist the pro bono services of more than 30 leading fund managers? More than $100 million raised for Australian non-profit organisations.

That’s the motivation behind Future Generation, the charitable investment model founded by Wilson Asset Management’s Geoff Wilson, which operates a fund-of-funds model, investing in a suite of existing investment funds from leading local and global managers.

And those managers waive all fees, allowing Future Generation to focus on its dual missions, says Future Generation Chief Investment Officer Lee Hopperton.

“The Future Generation investment model is simple and highly effective, delivering returns for investors while supporting high impact Australian not-for-profit organisations.
“Our investment portfolios are made up of funds rather than stocks and unlike most fund-of-fund models where there are several layers of fees, we don’t charge any.”
More than $1.3 billion is now invested across Future Generation Australian (ASX: FGX), Future Generation Global (ASX: FGG), and the unlisted trust Future Generation Women.

Here, Hopperton talks us through how it all works, why it’s overweight small and mid-caps and added systematic, and the key advantages of a fund-of-funds model.

How has your approach to portfolio construction changed over time?

The Future Generation investment portfolios are constructed by experienced, highly credentialed Investment Committees that comprise of institutional CIOs, asset consultants and fund managers, including our Founder and main supporter Geoff Wilson AO.

We manage our portfolios actively to make sure that we have the appropriate blend and biases to deliver the best risk-adjusted returns we can.

The Investment Committees have a long-term perspective on portfolio construction, but recent years have seen the portfolios introduce a number of systematic managers like Vinva, Plato and RQI, reduce exposure to market neutral managers and regularly make adjustments to ensure the style, sector and manager exposures are maintained to an agreed range. Periodically new managers are introduced in an effort to optimise the portfolio’s potential.

What’s your most notable overweight and why?

The Future Generation portfolios are overweight small and medium capitalised companies because we believe they offer the best opportunity for active managers to achieve outperformance.

Smaller companies are often less well understood and researched, and this gives more opportunity for active managers to add value through stock selection.
Share prices of smaller companies are typically more volatile but for investors with a longer-term horizon, or those like Future Generation that are able to diversify exposures to smooth returns, they offer an attractive risk-reward profile.

Over the last decade or more this part of the market has had a tougher time, both in Australia and globally as the larger companies have dominated. It’s an anomaly and opportunity for future performance.

What’s your most notable underweight and why?

The flip side of the underperformance of small and medium sized companies is the recent dominance of large and mega cap companies. This is particularly evident in global markets where the mega caps have dominated index performance.

Depending on your measure, the largest 10 companies in world markets have driven between a third and half of all the index growth over the last decade and between half and three-quarters over the last five years.

A decade ago, the 10 largest companies made up 10% of the world index value and now it’s almost a third. The concentration in equity indices is also dominated by industry and theme, with eight of the top 10 companies being technology or technology-related companies with exposure to artificial intelligence.

This poses a risk to markets that is resonant to the technology boom in early 2000 and a notable opportunity for active managers to deliver strong alpha.

Future Generation Global managers are typically underweight these dominant technology companies and the portfolio’s bias to managers focussed on quality smaller and mid cap stocks leans us away from this concentration risk.

This positioning diversifies the portfolio away from US and tech concentration, which is driving the extreme dispersion in stock and manager returns, resulting in market concentration and dominance of a small number of stocks.

What’s been one of your most notable performers over the last quarter?

As Future Generation operates as a fund-of-funds model, it gives us the opportunity to deliver on our investment objective of attractive returns with lower volatility than the market, by diversifying our portfolio across some of the best active fund managers in Australia and around the world.

Our portfolios are diversified by manager, strategy and style. This is important because different markets favour different investment styles. We wouldn’t expect all the fund managers our Investment Committee has selected to outperform at the same time.

Over the last quarter, we’ve seen strong outperformance in some of our global growth-orientated managers such as Munro Partners, Ellerston Capital and also Australian long-short manager, L1 Capital.

What are the themes and trends dominating discussions right now?

The Investment Committee discussions are very focussed on making sure we have an appropriate blend of managers and that those managers are performing in line with our expectations.

The dominant discussions have been the extreme dispersion in stock and manager returns resulting from market concentration and dominance of a small number of stocks and themes. It’s worth noting that this market set up is very attractive for fund managers as market extremes offer them a lot of opportunities to set their portfolios for future performance.

Given our objective is to offer attractive risk-adjusted returns with lower volatility than the market, making sure we are properly diversified to protect against a sharp market rotation or correction is of paramount importance to us.

We are conscious that we are managing $1.3 billion for more than 12,000 investors and supporting over 30 non-profits working to help vulnerable young Australians, youth mental health and improve access to work for women facing the greatest barriers.

With this in mind, risk management is always front of mind for us.